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Question 30: How can Kanban & MRP be integrated & can MRP cope with short lead-times?

Our sales are fairly fast moving and we attempt to supply everything with a 5 day turnaround.

We have an MRP1 system which is used to schedule materials from forecasts, which of course are never accurate. But we do not at the moment allow our production to be based on the MRP schedule. Rather in Kanban fashion, we build goods to maintain a finished goods stock level, and build as required to maintain these levels.

If I may I have two questions:

1. Can MRP alone ever cope with the situation where delivery times are very short?

2. Given the fundamental differences between "push" and "pull" systems, can MRP & Kanban be combined, to give the best of both worlds?

Thanks....(Name & address supplied)

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Answer

Hello ....

What you are questioning here is the Manufacturing Strategy and Inventory Strategy, as well as the manufacturing control strategy. I.e. to what extent can you make to order as opposed to make for stock / assemble to order. Lead-time analysis and Commonality Trees (articles attached) should help you here. (See Previous Technique T008: Lead-time Analysis.) and (Previous Technique T002: Commonality Trees)

Now to answer your questions directly, but in reverse order:

The MRP / Kanban conflict

MRP & Kanban Systems can co-exist in a complementary way if the roles are properly defined. E.g. If MRP produces advisory schedules, or if MRP is driven by reorders from finished stock (at lead-time), or MRP runs warehouse replenishment, whilst Kanban Systems run supplier replenishment. This requires the segmentation of the process to arrive at a satisfactory definition of roles. This situation is described in the article Kanban Systems.
Typically I would not use MRP for fast moving items except perhaps to produce long term advisory schedules for suppliers and manufacturing to help them with long range planning. (But even that is a bit of overkill for fast movers.) I would use Kanban to drive manufacturing, based on replenishment of finished stocks (or sub assemblies in assemble-to-order situations), and use Kanban to call off from advisory supplier schedules. (This however does not work well where raw materials are highly product specific.)

The Lead-time problem

The need to forecast is based on the fact that whilst customers expect short lead-time, your supply chain lead-time is longer. Producing a supplier schedule based on a forecast for at least lead-time is therefore a necessity. One role of MRP could therefore be (the role you have currently defined) to convert a product forecast into a forecast at raw materials level for suppliers. Given that accurate forecasting is difficult, there therefore needs to be a buffer (capacity or stock, see below) to accommodate the error. However if component and raw materials commonality exists it may be simpler to forecast using a projection of historical demand at raw materials usage level, (and can be more accurate provided that this exists within a forecasting process which includes other inputs.) (See Producing Accurate Forecasts.)
Alternatively MRP can be configured to be driven by a forecast and replenish finished stock by incorporating (properly set) finished buffer stocks at MPS level (possibly product level in your case.)
- So the short answer to your first question is "YES", but it would probably not be my first choice.
With either method unless your actual observed supply chain lead-times are short you will be forced to hold higher levels of stockholding to support this lead-time and uncertainty.
You have, I think, arrived at a reasonably sensible segmentation for a relatively simple assembled product based on:
1. A push system to forecast demand at all BOM levels based on MRP1
2. A pull systems to replenish (finished) stock, (which could be extended to cover raw materials for fast moving items)
However clearly there is a potential mismatch between push and pull systems based on forecast error, which must be managed. In particular this can cause "feast and famine" problems (and inefficient use of capacity) unless you:
- Improve the Demand Management process to improve forecast accuracy (and in some cases reduce or eliminate the need to forecast);
  - If your forecast is inaccurate at lead-time you will encounter shortages and overstocking, unless your supply chain is very "agile". (Also see Producing Accurate Forecasts)
- Use the correct type of Kanban System;
- Use an appropriate mix of Inventory Strategies, Batching policies and replenishment methods (Which we teach in our SSC07 Strategic Supply Chain Management training course.) (Also see Previous Technique T014: Re-Order Point Systems (ROP));
- Have a Capacity Management process;
- Have a good mathematically sound method of maintaining reorder levels and minimum stocks. (Which we teach in our SSC03 Advanced Forecasting & Inventory Modelling using Spreadsheets (Microsoft Excel®) training course.)

You can buffer demand volatility with either stock or capacity. For example, if you can respond to demand volatility with manufacturing capacity flexibility, you do not need to hold finished stock, but you need sufficient raw materials buffer or supplier agility to allow this. Alternatively you could use lead-time analysis to establish an Inventory Strategy and to determine to what degree MRP does not need a forecast.

I would need more information to advise you properly as to which methods are appropriate in your circumstances, but suggest meanwhile that you take a look at:

I hope this helps

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Question 30: How can Kanban & MRP be integrated & can MRP cope with short lead-times?

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Hello ....

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